Introduction
- The stock market is a dynamic place where investors trade in various securities.
- The primary objective of stock market investment is wealth creation, with the added benefit of portfolio diversification.
- To streamline your investment journey, it is necessary to be acquainted with the stock market's terminology.
- This article sheds light on an important term known as the 'holding period.'
What is a Holding Period?
- The term 'holding period' refers to the time duration for which an investor holds a particular stock. It is the duration between the purchase and sale of an asset.
- If an investor invests Rs. 1,50,000 with an interest rate of 10% for five years, the holding period will be five years.
- The holding period can be short-term or long-term. If the share is held for less than a year, it is considered a short-term holding; otherwise, a long-term holding.
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How is the Holding Period Calculated?
- The formula for calculating the holding period is given below:
Return = Income = (EOPV - IV) / IV
EOPV stands for End of Period Value.
IV stands for Initial Value.
- The holding period return is a metric that evaluates the worth of a stock and makes comparisons with other available shares.
- It quantifies the return obtained from holding a stock over a specific period, which can be either positive or negative, depending on the selling price upon disposal.
What is The Importance of a Holding Period?
Listed below are two major reasons that contribute to the importance of the holding period.
The tax levied on the stock is determined based on the holding period. If an asset is sold before a specific threshold, it becomes subject to short-term capital gains tax. Conversely, assets held for a considerable period of time are subject to long-term capital gains tax.
The holding period is a crucial factor in calculating investment returns, particularly for equity investments. Such investments offer multiple sources of income, including capital appreciation and dividends.
Conclusion
- As an investor, it is crucial to understand the concept of a holding period to maximize returns and make intelligent decisions.
- It not only determines the tax implications but also helps in assessing the performance of the investment. Investors gain a comprehensive picture of their investment's profitability by considering the duration of holding an asset.
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